Monday, June 20, 2016

Last
week I discussed the struggles of energy-poor countries to literally bring
the light to their citizens. But what happens if the opposite is the case? What
if a country is producing so much energy that it has a surplus? Surely this
would be a celebrated milestone and a boon for all pushing for a renewable
energy future. However, as Germany has seen, the reality of a renewable surplus
can actually be a difficult situation to handle effectively. Today’s blog post
will explore what can happen to a pro-renewable country when it starts growing
very quickly, and what lessons can be learned to ensure that renewable energy
has room to grow.

Germany
as a Renewable Energy Role Model

Germany has long
been a champion for renewable energy deployment and policy, inspiring more renewable
energy adoption globally. Germany has pushed for ever increasing adoption of
renewable energy since it passed the Renewable Energy Law (“EEG” in German) of 2000. Since the EEG
passed, the law has helped Germany’s renewable energy production increase from
a mere 6% in 1999 to 33% in 2015. EEG has helped foster this growth by
establishing a feed-in tariff subsidy (commonly referred to as a “FIT”) for
renewable energy production. Germany’s FIT required utility companies to buy
any third-party solar or wind generation at a set rate per kilowatt-hour (kWh)
through a 20-year contract. At the beginning of the program, the FIT was set
quite high to help offset the then-high prices of renewable energy development.
Over time, these tariffs have dropped as renewable technology advanced. The EEG
also gave renewable energy production preferred access to the grid so it was dispatched
before conventional fossil fuel-generated electricity. This policy ensured that
producers of renewable energy were guaranteed a market for their power,
spurring regional and global development of renewable energy technology and
deployment.

Last year, European deployment of renewable energy reached a new zenith. In May 2016, the United Kingdom generated
1,336 gigawatt-hours (GWh) of solar electricity compared to 893 GWh from coal.
This was the first time that the UK ever generated more solar electricity than
coal-generated electrity. In the same month, Portugal was able to produce
enough renewable electricity to power the entire country for 107 hours. From
May 7 to 11, 2015, Germany ran 100% off solar, wind, and hydro power. Also in
2015, Denmark generated enough renewable-generated electricity to meet 140% of its
demand. Interconnections
with Germany and Norway enabled Denmark to export this excess energy.

Struggling with Surplus

In light of all
this progress, the ruling party coalition in Germany has proposed a radical
shift from the current FIT system, away from the guaranteed kWh rate and
towards a more competitive market based system. . Beginning in 2017, Germany
will cap the amount of new solar and wind projects that go online, as well as
create a bidding system in which project proposals will compete in a auction in
which the lowest kWh rate offer will win. Onshore wind capacity will be capped
at 2.8 GW a year, and solar capacity at 2.5 GW. At first glance these policies may seem designed to completely hamstring Germany’s
remarkable renewable progress. However, it deserves a more nuanced analysis.

Currently Germany ranks third among countries in terms of overall
renewable energy production capacity. However, it far outshines China and the
U.S. (number one and two in terms of capacity) in renewable energy capacity(?) per
capita. Despite all of this renewable energy, Germany’s household electric
bills continue to be extremely expensive.
A large portion of this cost, nearly 22% of the total
bill, is attributable to the structure of the EEG itself. By guaranteeing
rates to producers, consumers end up shouldering the difference in cost of
wholesale, conventional electricity versus renewable electricity. Since oil and
gas prices have dropped, the EEG rate per kWh has increased. The EEG-surcharge
has risen from 2.05 cents per kWh in 2010 to 6.35 cents kWh in 2016.

Germany’s FIT
surcharge is partially
responsible for the country’s upcoming policy revisions, but another more
practical issue is the lack of infrastructure to efficiently handle intermittent
renewable energy and transport it from the energy-rich north to the demanding
south. However, recent efforts to expand the capacity for north-south
transmission have seen some political setbacks. Thus, German leadership has looked to
alternative measures to try to balance the interests of all parties. Fossil fuel
utilities want to ensure that they don’t have to pay to deliver their energy to
the grid and reduce their production in times of solar and wind booms. This
occurred just last month on May 8 when power prices went negative for a few hours. While low power prices may
be good for consumers, utilities end up operating at a loss because they cannot
easily ramp down the coal and nuclear plants they operate and must take a mandated
backseat to renewable production.

All Eyes on Germany’s Green Energy
Experiment

While the grid
in Germany is currently lacks capacity and flexibility to handle incremental
renewable generation, many are looking to increase the flexibility of the
country’s transmission infrastructure to ensure that renewable sources can
continue to provide record levels of electricity to consumers. These efforts
make fiscal sense. The German government is planning for a renewable dominated
market, and has approved a €400-million program to research smart-grid and
storage technology. Flexibility and expansion in the grid could help solve many
of the problems that abundant third-party energy poses to utilities. Even the
embattled Volkswagen company is taking an opportunity to rethink how
it will do business in this green energy rich future.

For the time
being, an alteration of Germany’s energy program may be a practical short-term
solution. However, many critics watch with a wary eye as the same country that
helped establish a burgeoning global market for clean energy might be pumping
the brakes. For now, the great German role model continues to break new grounds
of renewable adoption as the rest of the world looks on, eager to see how their
great policy experiment plays out.